The Delaware Advantage - Greater Security
Shielding trust assets from creditors is a primary consideration in Delaware.
In every state, trust assets are protected from a trustee’s creditors, but not necessarily from a beneficiary’s creditors. For example, if a beneficiary is divorced, his or her estranged spouse may have a legal right to all or a portion of those assets.
Whether a creditor can obtain assets belonging to a trust beneficiary depends on state law concerning so-called "spendthrift" provisions of a trust. (See glossary.) Some states don’t recognize spendthrift trusts; others only to limited degrees.
For example, Virginia recognizes them up to $500,000.4 In California, a creditor can reach any amount above what is needed to provide for the beneficiary’s support.5
Delaware will not allow a creditor to reach the principal of a spendthrift trust for any purpose—except when an individual tries to put assets outside the reach of creditors by creating a trust for him or herself.6
Discretionary income is also protected.7 However, when a beneficiary is supposed to receive regular income from a trust, Delaware allows the beneficiary’s spouse or children to receive income to meet a support obligation,8 but neither a creditor9 nor trustee in bankruptcy10 can reach that income.
In Delaware, assets held by a bank trustee are exempt from attachment;11 a beneficiary’s creditors can’t attach assets even if a trust has no spendthrift provision;12 and a would-be plaintiff can’t use attachment proceedings to obtain jurisdiction over a trust beneficiary.13
Nonetheless, a beneficiary of a Delaware Trust can assign up to one-half of the interest in a spendthrift trust to charity—even though spendthrift trust interests are, as a rule, absolutely unassignable.14 This gives beneficiaries greater flexibility than in other states and permits sophisticated tax planning.15